Key Developments Could Propel these Oil Companies Higher
Imagine this: You are an E&P player, and you are going to drill 100 wells in one year. The cost savings from dropping the well costs from $10 million to $8 million would be $200 million dollars. That means you could drill an extra 25 wells, return cash to shareholders or purchase more leaseholds.
Just a dream?
Well, not for Continental Resources and Oasis Petroleum , who have both been able to drive the cost of drilling a well down to $8 million. From Continental's latest earnings report :
"This compares to our 2012 average of $9.2 million completed well cost for a single Continental-operated well... We have now hit our $8.2 million target 6 months early. And we anticipate consistently delivering operated wells for $8 million or less."
And from Oasis' latest earnings report :
"(O)ur average well cost dropped again to $8.2 million, excluding the cost savings from OWS. With the progress we've made already to date, we can drive well cost to our year end target of $8 million per well if not below."
This is very good news for Oasis, but when you factor in the cost savings from OWS, it gets even better.
"Oasis Well Services has also delivered great results, saving the company approximately $400,000 per net well completed."
Both Continental and Oasis have been able to drive well costs down substantially, which enables them to drill more wells for the same cost. This aims to drive production growth, boost the top and bottom line and thus, aid in stock price appreciation.
Kodiak Oil and Gas , on the other hand, still has a ways to go, with well costs hovering around $9.7 to $10.2 million . While this is significantly less than the $12 million last year, it still has a ways to go to reaching the kind of efficiency the other players have. If Kodiak reduced its well costs to levels comparable to the other players, with a capex budget of $950 million to $1 billion, it could save $200 million in just one year. One way Kodiak is reducing costs is switching to pad drilling. This is evident in its two pilot projects.
The two pilot projects going on right now are the Polar play and the Smokey play. Both are located in the Bakken, but only one is currently up and running. Preliminary data on the Polar play shows initial production levels at an average of 2,549 boepd (barrels of oil equivalent a day) for the 12 test wells.
This is very promising information, but investors will have to wait for an update to make sure these numbers hold. Any Bakken well that produces more than 2,000 boepd is a strong well. When investors get the update, Kodiak will also provide a glimpse into the Smokey play. This is one of the biggest catalysts for Kodiak and could significantly move the stock price.
Another big catalyst is the completion of 29 net wells next quarter, which is higher than the 18 completed in the first quarter and 24 completed in the second. This should push Kodiak's output up much higher and alleviate investor concerns around Kodiak's $660 million purchase in the Bakken which increased its holdings to 196,000 net acres (all in the Bakken and Three-Forks play) while adding $400 million in debt to its balance sheet.
The other two
Oasis and Continental are also working on boosting output, with Oasis planning on completing more wells this quarter than last. Oasis has only spent 42% of its $1 billion capex budget, so the second half of the year is when management really wants to ramp up drilling, complete more wells and push up oil production.
Oasis plans on finishing 40-45 gross wells next quarter and has guided for production levels to rise 31,500-34,500 boepd due to more wells coming online. This would be a production boost of 4.4% to 13.4% quarter over quarter. In the long term, Oasis will be able to stretch its capex budget further due to cheaper well completion costs. This will allow more wells to be completed in 2014 over 2013 and is a bullish sign.
Continental currently has 20 rigs running and has completed 138 wells in first half of the year. Continental guided for 245 wells to be completed in total of 2013, so one could expect between 50 and 60 wells will be completed next quarter.
This doesn't mean Continental is backing away from the Bakken, it is just that in order to drill you need the right weather conditions and the winter makes it significantly harder to drill. Continental is planning on more completions in the first half of 2014, which will be significantly helped by its backlog which stands at 75 wells right now . Continental's management has been heavily leaning on Bakken production - which is up 65% this year - to reach its goal of 38-40% annual production growth.
It's hard to go against rising margins and rising revenue streams and is why you should bet on domestic oil production. All three of these players have reduced the costs to drill while boosting output at the same time. This kind of innovation can't be ignored and provides a great investing thesis for each of these oil and gas producers.
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The article Key Developments Could Propel these Oil Companies Higher originally appeared on Fool.com.
Callum Turcan owns shares of Kodiak and Oasis. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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